On October 25, 2022, the Congress on the Bankruptcy Reform and other current relevant issues in the Commercial Courts by FIDE with the collaboration of Altamira doValue, a highly anticipated meeting between professionals in the insolvency and restructuring sector.
This summary includes not only the interventions of the speakers, but also the contributions of the attendees, which were numerous and contributed to enriching the debate.
The Congress was held at the headquarters of FIDE at the College of Architects of Madrid. The high number of attendees reflected not only the desire to see and meet old and new colleagues "live", but also the great interest of all in understanding (or trying to understand) the novelties of Law 16/2022, of 5 September, reform of the consolidated text of the Bankruptcy Law, approved by Royal Legislative Decree 1/2020, of May 5, for the transposition of Directive (EU) 2019/1023 of the European Parliament and of the Council, of June 20 of 2019, on frameworks for preventive restructuring, exoneration of debts and disqualifications, and on measures to increase the efficiency of the procedures for restructuring, insolvency and exoneration of debts, and by which Directive (EU) 2017/1132 of the Parliament is amended European Union and of the Council, on certain aspects of company law (Directive on restructuring and insolvency).
During their warm welcome, the academic directors of the event highlighted four points that would mark the content of the debates for the rest of the day: (i) how bankruptcy reform represents an opportunity for the financial system, (ii) the economic impact of its content, (iii) the greater role of creditors in the adoption of pre-bankruptcy measures, and (iv) the will of the legislator to alleviate the Court workload.
Thus began a day in which, through five round tables made up of lawyers, economists, representatives of the financial sector and the judiciary, the main novelties of the bankruptcy reform would be covered.
1. - The first round table of the day focused on “the day after the bankruptcy moratorium and the impact of the entry into force of the Reform”.
As the speakers explained, it was necessary to begin the Congress by putting the reform in context, since it coincides with a new scenario in the legal and economic world.
On the one hand, at the legal level, the bankruptcy reform enters into force after a long period of moratoriums on compliance with bankruptcy and commercial obligations.
On the other hand, at an economic level, the reform has coincided with the end of a stage of "liquidity free bar", mainly motivated by the pandemic.
Beginning with the first point, given the successive bankruptcy moratoriums that have lasted almost two and a half years, there was enormous concern at the judicial level about a potential "flood" of bankruptcies after the end of this phase, which took place on past June 30, 2022.
Representatives of the judiciary indicated that, given the imminent entry into force of the new Bankruptcy Law, at the beginning of September there had been an increase in the number of requests for voluntary bankruptcy of natural persons, mainly due to the change in the regime on the exoneration of the dissatisfied liability. In the same way, they stressed that there had been an increase in the presentation of voluntary bankruptcies of legal persons to benefit from the so-called "bankruptcy Express” which, under the previous regime, allowed the declaration and conclusion of the bankruptcy in a single act.
However, the speakers confirmed that the end of the bankruptcy moratorium has not triggered the feared avalanche of bankruptcies, at least with regard to legal persons, nor has it led to an increase in restructuring processes.
Will the hypothetical barrage of contests arrive at some point?
Many of the speakers indicated that it is expected that both the number of bankruptcies and restructurings will increase exponentially throughout the first half of 2023. But there were also those who wanted to "wet" a little more in their bet, and pointed out that they foresaw a dramatic scenario from March 2023, given that the sum of "factors" of the current environment (the war in Ukraine, the inflation, the energy crisis, the increase in financing costs) represent a “perfect storm”, determinant of a crisis. Of course, what is not known is what the size of the crisis will be, nor its duration.
After analyzing the end of the moratorium, the following question was obvious: What is the scenario that we are going to find in the coming months?
The speakers commented that they understood that, before the increase in the number of competitions, a phase in which the need to restructure the financing is considered is foreseeable.
There was unanimity in commenting that With the bankruptcy reform, the legislator is strengthening the role of the creditor in the restructuring processes, which raises a question about what the debtor's role will be in a scenario in which the creditors want to move forward without the approval, not of the partners, but of the debtor himself. In this sense, it was found that the reform may be pointing to a certain paradigm shift, regarding the fiduciary duties of administrators, more oriented towards the creditor.
Regarding future restructuring under the new regime, the speakers highlighted the following issues:
- Its greater complexity, and the foreseeable increase in litigation derived from it.
- The good reception of the sector to the new figure of the restructuring expert, and the need for him to be seen as a third party who can be trusted, as a mediator.
- The need for the Commercial Courts to carry out a practical application, for which the adoption of measures to promote specialization is being considered, depending on the different types of procedures that may arise.
- Notification of the start of negotiations, as a tool to promote restructuring plans and avoid insolvency.
Going down to an economic plane, the speakers commented that, to date, no “carry-over effect” had been observed between large and small companies since the current contests are mostly affecting small companies and individuals.
Among the comments from the attendees, it was indicated that, although it is true that financial institutions arrive in a better situation in the current crisis environment, and have more liquidity than in 2008, for example, it must be borne in mind that the European Commission is pushing to avoid patchwork solutions, instead of looking at the long term.
It did not go unnoticed among the speakers that, although the bankruptcy reform gives greater power to creditors, in general terms, it seems that there are "better off" creditors, such as the caso of public credit. Given that the public credit situation would be discussed at the last round table, they did not want to delve into the subject, but the speakers did not miss the opportunity to confirm that the content of the Additional Provision 8 of the new Bankruptcy Law it is disappointing, and reported on the fact that the first question for a preliminary ruling on the possible infringement of the Directive has already been raised, in this regard.
Another topic that aroused great interest was the end of the moratorium on the legal obligation to take measures in caso that the debtor is in dissolution proceedings, which was adopted as a result of the pandemic situation in 2020, and which will end on December 31, 2022.
Again, this issue was analyzed from the legal point of view, and from the economic point of view.
On the legal level, the speakers agreed that it was essential that there be a connection between bankruptcy and commercial law, applauding this change in the bankruptcy reform.
Likewise, it was raised whether, in March 2022, the losses of the last two years should be computed or not. The speakers agreed in understanding that, once the moratorium ends, the losses of the last two years must be taken into account, and must adopt measures in this regard within the legally enforceable term in caso that the company is in cause of dissolution. This would be so because the reality of society must be reflected in its accounting and because the literality of the norm does not allow us to understand anything else.
On the economic front, the speakers commented that the “commercial moratorium” has generated “zombie” companies (undercapitalized), but it has also allowed many others to be saved. And, as happened in the legal analysis of the issue, it was indicated that this moratorium should also be understood at an economic level as a temporary measure, as the Ministry of Economy confirmed in response to a query raised by the General Council of Economists. (in relation to the provision relating to the financial year 2021).
Lastly, the first round table dealt with the delicate issue of administrators' liability, in the context of the bankruptcy moratorium.
Although the speakers began by remembering that each caso will have to be examined individually, they also warned about the fact that the Potential liability of administrators for failing to comply with their obligation to request the bankruptcy, despite the moratorium, referring to the Judgment of the Commercial Court no. in a caso in which the debtor was insolvent before the entry into force of the moratorium.
Likewise, although it was indicated that the moratorium was not causalized (in the sense that any debtor would benefit from it, regardless of whether the insolvency was motivated by causes other than the Pandemic), it was warned of the possibility of declaring a guilty bankruptcy (regardless of the bankruptcy moratorium), based on the aggravation of the insolvency during the moratorium period, in caso that it is understood that the insolvency was irreversible.
At the end of the session, there was a break in which all attendees had the opportunity to continue discussing the content of the first session.
2. - The second round table was about the “early detection of insolvency, new business restructuring plans and the role of the Restructuring Expert”.
The debate began by confirming the opinion of the first round table on the situation of bankruptcies in Spain: the number of bankruptcies of legal persons has not undergone major changes, although there has been an increase in the number of natural person bankruptcies.
As the current economic situation is uncertain, the speakers insisted that anticipation is essential, both on the part of debtors and creditors, among whom financial institutions continue to play a fundamental role.
Comparing the legal framework, it was indicated that, although the previous one was not the most appropriate to adopt anticipatory measures and preserve the value of the debtor company, the introduction of the concept of "probability of insolvency" can help debtors to act before. However, he warned that not everything depends on the legal framework; For example, it will be necessary to see what happens with the provisions of the banks, or what finally happens with the credits ICO (Official Credit Institute) (if there is no change in the regulations in this regard in the coming months).
What anticipatory measures can financial creditors take?
Three measures were highlighted, among others: (i) maintain a relationship of closeness to the debtor; (ii) the adoption of internal classification systems (for which the speakers, how financial entities, classify in stages (training 1, training 2 y training 3) by the); and (iii) be up to date with the data of each sector, to understand their situation and evolution.
When debating this issue, both the audience and the speakers highlighted the importance of taking action when in "stage" 1), and how banks are changing their internal dynamics to be able to take anticipatory measures, precisely as a reflection of the lessons learned from the previous crisis.
The probability of insolvency was described as a tool that could contribute to the time control, understanding this as an essential factor. It was explained that, in many casos, a faster and “less perfect” solution was preferable, which would preserve value to a greater extent.
However, it was also qualified that, given that the start of negotiations based on the probability of insolvency of the debtor will have implications for financial institutions (even if the restructuring plan does not succeed later), and given that the probability of insolvency is a a favorable tool to avoid strategic crises, but it is not necessarily a favorable tool to avoid liquidity crises, it is likely that this concept will only be used when trying to standardize the restructuring agreement, in particular, to achieve the dragging of dissident creditors.
What factors can help “save” a greater number of companies, in addition to anticipation? Two were highlighted: (i) the greatest transparency in the markets, which provides more security to creditors; and (ii) the fight against the stigmatization of creditor entities, financial institutions and funds.
Throughout caso, there were those who opted for a vision darwinian, and they defended the idea that it was preferable that insurmountable companies be liquidated, so that resources can be allocated to truly viable companies.
In line with the greater role of creditors in restructuring, there was a debate about the formation of classes. The speakers highlighted that the formation of classes will depend a lot on practice: while there were those who considered that it would be the professionals who would determine their operation over time, there were those who also raised the possibility that the Courts publish a guide to good practices.
The speakers stressed that the bankruptcy reform presents challenges and opportunities.
Regarding the challenges, the innovative possibility of dragging shareholders, and the new role of suppliers, who from now on will have a voice and a vote. However, their role in the negotiations was questioned among the speakers, since they do not have access to meeting forums, they are not used to restructuring, and, in general, they have less ability to negotiate with the debtor. However, it was also noted that there casos in which the provider has more weight.
All agreed that the challenge for providers will be to learn to organize and adapt to restructuring, since what is happening is a change in dynamics for them.
Regarding the opportunities, it was highlighted the participation of new agents, such as American and English financiers who have an appetite in Spain, and to whom the new legislation will be more familiar, due to its Anglo-Saxon inspiration. And although it is true that in many casothey will pretend to stay with him equity, their presence will also help save businesses and better manage the debtor company's activity, if they provide the necessary new money. Of course, they are more likely to become players in the restructuring of large companies than small companies.
In addition, given the regulator's pressure on banks to eliminate "problematic" situations from their balance sheets, and the current uncertainty with ICO credits, it is very possible that in the future this situation favors the sale of portfolios, which will mean an additional opportunity for certain entities. However, the regulation of ICO credits prevents their sale, so it is difficult for them to become part of the portfolios, unless formulas such as those discussed at the last table are enabled.
Finally, the second round table addressed the new figure of the restructuring expert. As a reference, it was indicated that in the United Kingdom there is a similar figure, which deals with constituting evidence to demonstrate that the creditor (or classes of creditors) is in a better situation signing a restructuring plan than in the alternative bankruptcy scenario .
In addition to highlighting its importance in being able to assist the Courts (which havecasos media), it was considered what would happen in caso of the concurrence of various restructuring plans: should the turnaround expert decide what is the “best” plan? Among the speakers and the public there was no clear answer, although two options were planned, the most advantageous for creditors or in their caso, if it is not possible for a criterion of temporality to prevail.
Finally, it was questioned potential liability of the restructuring expert. The speakers ruled out any liability, except in situations of gross negligence.
Along the same lines, the possibility was raised that creditors who have adhered to a restructuring plan could be considered as de facto administrators in a later contest. This assumption was branded as “outrageous” by some speakers, who argued that the law intends to encourage such participation, through different means, which would not be consistent with assuming the risk of administration in fact.
3.- After lunch, the third session, dedicated to dealing with “Special regime for microenterprises”.
As is well known, the regime provided for microenterprises will enter into force on January 1, 2023.
The procedure designed for micro-enterprises is designed to be simple, without the involvement of a lawyer or a bankruptcy administrator, through the creation of an electronic platform.
However, the platform is not working. It has been legislated for a context that, today, does not exist. Hence, there are many voices that have branded this regulation as unnecessary or that have called for an even later entry into force.
The success of this regime depends fundamentally on computer tools, so all eyes are on technological development.
At first, It is a simple procedure: there is no insolvency administrator, except in caso of liquidation, nor an expert in restructuring, unless requested.
But in caso that a bankruptcy administrator is appointed, (i) his remuneration will not be considered as a claim against the estate, and (ii) if he is appointed by the creditor, he will be the one who has to pay the fees, so there are no incentives for this figure to exist.
In microenterprise competitions, in general, the debtor's functions will not be suspended, precisely because there will be no bankruptcy administrator. However, a creditor may request the replacement of the administrative body (i) when the behavior of the debtor is not "adequate" (without it being clear what is meant by this), or (ii) when the information provided is incomplete.
A relevant question is whether it is possible to restructure a microenterprise. It was explained that the continuation procedure is intended to be a replica of Book I, but the way of doing it was criticized, when it would have been easier to make a reference to said Book I.
As in the general regime, there will be class formation, and drag of dissident creditors through the approval mechanism.
For the extension of effects to dissident creditors, it will be necessary to appoint a restructuring expert to confirm that the continuation plan is a better scenario than the liquidation scenario. However, as also happens in the general regime, neither the Treasury nor Social Security can be affected by the continuation plan, which was once again criticized by the attendees.
Regarding the approval, it was explained that it may be tacit or express, the first of which is given. casos in cases in which the creditor does not respond on time.
In the microenterprise system, the liquidation scenario does present important differences Regarding the general regime:
- The substitution regime does not apply.
- Yes there is a liquidation plan (which has disappeared in Book I).
- The settlement can have a maximum duration of 3 months (plus 1 month of extension).
- The sale of assets is carried out through the platform created for micro-enterprises. Again, skepticism about it was evident, and the lack of certainty about its operation.
After the general explanations on the regime applicable to micro-enterprises, a critical summary was made in this regard. Many questions were raised, to which the Law does not provide an answer:
- The deadlines do not match.
- It is not anticipated caso in which a creditor does not appear in the list of creditors proper of the debtor: will he be able to communicate his credit? In that caso, it would overlap with the deadline to challenge the inventory, so could you challenge it or not?
- The regime provided for micro-enterprises aims to simplify procedures and reduce the burden on the courts, but the electronic platform still does not work today, and it is evident that the courts do not have the technological means to do so. It will be necessary to see with what means the courts are endowed and if this happens immediately.
- The fact that the Treasury and Social Security cannot be dragged is a disincentive for other creditors.
- There are practical difficulties, such as whether or not the receipt issued by the platform confirming the award of an asset will serve as a registrable title. It was reported that the judges of Barcelona, at least, are going to meet with the Property Registrars to combine criteria, but it is pointed out that many assets will end up being donated if other alternatives prove too complicated.
In short, the third session summarized the situation as one of great uncertainty, where there is “more shadows than lights”.
4.- Thus, the fourth Round Table, about “liquidation with continuation of the activity”.
As is well known, in recent months the sale of production units has generated great interest as it is seen as a way to maximize the value of the debtor's assets in a situation of financial distress and, above all, keep jobs.
However, its regulation in the law is very short, which led the public to go "directly to the point" from the first minute, and raise their doubts about the differences between the mechanisms provided under article 224 ter TRLC (which refers to the possibility of appointing an expert) and article 216 TRLC (which refers to the possibility of sale through a specialized entity within the contest).
Then they discussed the new obligation to maintain the activity.
This obligation was described by the speakers (and the rest of the attendees through their questions and comments). as an obstacle to the sale of productive units, for many reasons:
- The TRLC refers to the obligation to maintain the activity for 2 years in article 224 septíes, and 3 years in article 224 bis. Is it a legislature error? There does not seem to be a reason to set different deadlines.
- What does it mean to “maintain” an activity? What is the true scope of this obligation? It's not the same to keep activity what to keep activity.
- The threat of a judgment for damages in caso failure to comply with the maintenance obligation will cause that in most of the casos the acquiring company is a company newco, whose solvency is doubtful. In addition, the alleged lack of jurisdiction of the Bankruptcy Judge to hear any action for damages for breach of this action would not contribute to destigmatizing this option, for which reason the possibility of justifying the jurisdiction of the Commercial Judge based on his functional competence.
It must be said that, later, during the fifth round table, a possible solution to this problem was raised through the seller's waiver of the maintenance obligation. But it will be the judges who say if the Law allows it.
The criticisms of the new legislation (regarding the obligation to maintain the activity) turned into praise when they began to talk about the jurisdiction of commercial judges in matters of business succession, which finally resolves the existing doubts, leaving the delimitation of the perimeter of the productive unit at the headquarters of the commercial judge.
However, the calm in the fourth round table was short-lived, and the debate was revived when the automatic subrogation in the contracts selected by the purchaser of the productive unit.
On the one hand, it was said that this possibility will lead to the fact that, in most of the casoyes, the resolution in the interest of the contest of the rest of the contracts, which will now have the effect of recognizing an ordinary credit. In this sense, it was proposed that the debtors consider filing an incidental demand for termination of a contract in the interest of the bankruptcy in parallel to the offer to purchase the productive unit (or that the offeror demands it as a condition) to ensure that the credit be recognized as a mere ordinary credit, and avoid a debt against the estate for a potential breach of contract.
It was also about the scope of the subrogation in credit contracts.
In the first place, the scope of the debt to be assumed by the acquirer generated great debate, distinguishing two interpretations in this regard: a first interpretation that defended that the acquirer must be subrogated to the entire existing debt, and a second interpretation that defended that the Drawn debt should be recognized as bankruptcy credit, and the subrogating company should only be obliged to pay the debt from the subrogation.
Secondly, it was questioned what happened in the casos in which the purchaser is subrogated in a financing contract with personal guarantee. The speakers considered that the guarantee is maintained since the change of subject obligated to pay is imposed by judicial authorization.
And, thirdly, the issue was analyzed from a "bureaucratic" point of view, and the problem surrounding the identity of the acquirer was raised: what happens if the acquirer does not pass the money laundering controls of a bank? Or what happens if his solvency is not proven? Could the acquirer find himself in a situation in which he cannot have access to a line of credit in which he has subrogated himself for failing to pass the internal PBC processes of an entity? Again, reference was made to the fact that any production unit sale process implies the presentation of an offer explaining in detail who the purchaser is and their solvency, and how said offer must be blessed with judicial authorization, for which said authorization The judicial process should serve as a confirmatory act for the internal processes of financial institutions.
Finally, it was discussed sale of productive units that includes assets and rights subject to credits with special privilege. Among the issues discussed, it is worth highlighting the guarantee valuation mechanism. The valuation of the guarantee must be carried out by the bankruptcy administrator, but how is it done or based on what? The speakers raised the possibility that the bankruptcy administrator bases himself on the appraisal value that is stated in the deed of constitution of the guarantee, which gave rise to the question of whether the purchaser could provide a new ECO appraisal. Throughout caso The speakers confirmed that the secured creditor's veto right may only operate when the sale price is less than the value of the asset.
5.- Finally, we arrive at the fifth and last round table of the afternoon, which dealt with "credit with special privilege in the contest, and public credit or with public guarantee/guarantee".
The speakers commented on how the new regulation directly affects privileged credit, especially in the pre-bankruptcy scenario in restructuring plans.
A creditor with special privilege must assess and compare its situation in a scenario where a restructuring plan is intended to be achieved, and a liquidation scenario.
In the same way, both for the debtor and for the rest of the creditors, it will be essential to know who is (or is intended to be) involved in the restructuring process, and whether or not they have guarantees, to determine the type of restructuring that can be raised
when debating Regarding credits with special privileges, the speakers highlighted their importance as a potential source of injection of liquidity in the system through their acquisition by third parties. (eg foreign funds). However, this will depend on the flexibility of the market, and legal certainty, which, to a large extent, rests on the judges.
In the same way, the problems that credits with special privileges could imply were discussed. Among these, the speakers mentioned the problem of habitual residence in the natural person bankruptcy, when the debtor accepts a payment plan and, therefore, it is not possible to sell or mortgage it. In this sense, it was indicated that not being able to sell a home, as well as not being able to encumber it, supposes the loss of value of the home, and that creditors with privilege over the asset in question are left at risk that the debtor is -truly- capable of meet the payment plan.
When analyzing the role of privileged creditors in the context of a restructuring plan, the controversial role of “ICO credits”. When dealing with this issue, two interpretations were put forward on how the content of Additional Provision 8 could affect the success of a restructuring plan.
There were those who argued that, in view of the current norm, any approach that implies refinancing the liability with the ICO will be reckless and will lead the debtor company to liquidation, at the moment in which the ICO responds negatively or for the foreseeable delay in response, (when it will be too late to start negotiations again). This being the case, only the injection of money will allow the ICO to be left out (but that will not always be possible).
On the other hand, it was argued that the ICO's participation in a restructuring plan can be considered to restrict its content (by limiting it to haircuts and waiting).
Given the difference in positions, it was agreed that it will be necessary to make a enormous effort to carry out the restructurings that involve loans guaranteed by the ICO.
From a more formal level, doubts were raised about the lack of certainty about the procedure to follow to obtain the necessary authorizations from the ICO to refinance without losing the guarantee.
Given the uncertainty of how the courts will apply the rule, and how this issue should be addressed from a formal level, the possibility of financial entities drawing up a guide to good practices in this regard was suggested, and the need for there to be an "extreme collaboration" in this regard, between these entities and the ICO.
In line with the issue, the fifth round table also revealed the lack of sensitivity of the legislator when "super-privileging" the public credit, and not allowing it to share the sacrifice that any restructuring implies. The speakers emphatically confirmed that the viability of the restructuring plans is compromised by the privileges maintained by the Treasury and Social Security, Therefore, they proposed different solutions in this regard.
In the first place, they suggested anticipating the restructuring at the moment in which the debtor is in a state of "probability of insolvency", where it is more likely that their debts before the Treasury and Social Security are up to date.
Second, in caso In the event that a restructuring plan does not prosper, the possibility was raised that at least the public debt could be sold at the venue of liquidation. In this regard, there were those who were very supportive of promoting measures that involve selling as much as possible. However, there were those who were more skeptical about this possibility.
The fifth round table concluded its debate by mentioning the treatment of SEPI and CO creditsFIDES.
The speakers raised the existing doubts regarding their classification, and put two relevant questions on the table: (i) how are SEPI credits treated, in which 50% of the amount was granted in the form of a participatory loan? (In principle, this percentage should be subordinated credit); and (ii) the possibility that a credit signed by SEPI is not necessarily a public credit: unless it is a grant, it should not be considered as such.
Thank you very much to all the speakers, moderators and attendees, for making a "work" day such an entertaining and enriching day.
In this Congress intervened:
• Beloved Cross
• Oscar Burgos
• Amanda Cohen
• Miguel Angel Diez
• Josu Echevarria
• Luis Farres
• Ramon Fernandez-Aceytuno
• Olga Forner
• Alvaro Gamez
• Jose Antonio Garcia-Argudo
• Patricia Garcia Barrios
• Jose Ramon Garcia Vicente
• Beatriz Gomez Justo
• Esther Guerra
• Cristina Jimenez Savurido
• Alvaro Lobato Lavin
• Yolanda Rios
• Alejandro Rodriguez Martinez
• Angel Rubio Burgos
• Sergio Serrano
• Pablo Tames
• Phaedra Valencia
• Iñigo Villoria.
This summary has been prepared by:
Alexandra Borrallo, Clifford Chance Attorney, SLP
All the information of the congress is available at:
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